Highlight PM Najib’s funding task mounts as Tenaga’s borrowing cost rises

by **Cals** Thu 23 Jan 2014, 18:38

Highlight PM Najib’s funding task mounts as Tenaga’s borrowing cost rises

Business & Markets 2014

Written by Bloomberg

Thursday, 23 January 2014 16:30

(JAN 23): Malaysia’s $444 billion development program is being complicated by rising costs as the state-owned power producer paid a percentage point more for its latest sukuk amid the fastest inflation in two years.

Tenaga Nasional Bhd., the nation’s biggest electricity company, sold Islamic bonds due in 2024 at a yield of 5.06 percent on Jan. 21, said a person with knowledge of the matter. The utility raised a total of 3.7 billion ringgit ($1.1 billion) from the issue in maturities of 10 to 20 years, and will use the proceeds to build a new plant in northern Perak state.

Investors will demand a premium for future issuance on prospects accelerating inflation will prompt Bank Negara Malaysia to increase its benchmark interest rate, according to BNP Paribas Investment Partners Najimah Sdn. Yields climbed this week at the treasury’s first sale of sukuk in 2014, raising borrowing costs as Prime Minister Najib Razak seeks to reduce the budget deficit and avoid a credit-rating downgrade.

“The government may be in a quandary as it will have to pay higher yields, while ensuring there isn’t too much pressure on the fiscal deficit,” Lam Chee Mun, a Kuala Lumpur-based fund manager at TA Investment Management Bhd. overseeing 680 million ringgit, said in a telephone interview yesterday. “Still, demand for sukuk will be there as pension funds, Islamic banks and insurers have few Shariah-compliant options.”

Fitch Warning

Najib is seeking to attain developed-nation status by 2020 by building roads, railways and utilities, with many of the projects farmed out to private or state-run enterprises. He’s aiming to boost per capita gross domestic product to $15,000 by the target date from $6,700 in 2010.

Fitch Ratings cut the outlook on Malaysia’s A- rating, the fourth-lowest investment grade, to negative from stable in July, citing deteriorating finances.

While Najib removed sugar subsidies and reduced those for fuel in the second half of 2013, consumer prices climbed 3.2 percent in December from a year earlier, the biggest increase since November 2011, the government reported late yesterday. Inflation may pick up further after Tenaga raised electricity tariffs from Jan. 1, 2014.

The prime minister is targeting to lower the budget deficit to 3 percent of GDP by 2015 from an estimated 4 percent in 2013, a commitment that was commended by Fitch in an October statement. Indonesia, another Muslim-dominated nation, is seeking to cut its shortfall to 1.69 percent in 2014 from an earlier goal of 2.4 percent, Finance Minister Chatib Basri said on Oct. 25.

‘Duration Risk’

Tenaga, which is rated the highest investment grade of AAA, sold 20-year sukuk this week at a yield of 5.8 percent, up from 4.66 percent at its previous offering in May, according to the person familiar who asked not to be identified because the information hasn’t been made public.

The extra yield investors demand to hold Malaysia’s 10-year Islamic bonds, those most sensitive to inflation expectations, over those due in two years widened to 121.9 basis points on Dec. 6, the highest in central bank data going back to June 2010. The difference has since shrunk to 108.

“The spread widened because of the aversion to duration risk,” Ray Choy, regional head of fixed-income research in Kuala Lumpur at RHB Research Institute Bhd., a unit of RHB Capital Bhd., said in a Jan. 21 phone interview. “Yields with maturities of more than 10 years could rise further.”

Malaysian companies that need funding will continue to tap the sukuk market as most of them have factored in higher borrowing costs, Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic Bank Bhd., a unit of CIMB Group Holdings Bhd., said in a phone interview in Kuala Lumpur yesterday.

‘Anchor Demand’

CIMB and AmInvestment Bank Bhd. predicted last month that total Shariah-compliant debt offerings in the Southeast Asian nation will increase about 33 percent in 2014 to 60 billion ringgit, as more government development projects come on stream. Offerings dropped 49 percent in 2013 to 49 billion ringgit.

Local corporations have already announced 5.6 billion ringgit in total planned issuance for January, which would exceed the 2.3 billion ringgit sold in the first 31 days of the same month of 2013, data compiled by Bloomberg show.

The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, which tracks the most-traded local-currency notes issued in the nation, fell 0.6 percent this year to 104.51 after gaining 2.8 percent in 2013. It reached a record high of 105.39 on Jan. 20.

“With a general lack of appetite for duration and the larger supply as issuers rush to lock in yields, we expect credit spreads to widen,” Khoo Poh Sim, a senior portfolio manager at BNP Paribas Investment Partners Najimah, who helps oversee 554 million euros ($751 million), said in a Jan. 21 e- mail interview. “At levels deemed attractive, traditional supporters of sukuk will anchor demand.”